Social Security COLAs Have Lifted Benefits 84% Over the Last Quarter Century. Is That Enough?

Social Security benefits increase annually thanks to a cost-of-living-adjustment (COLA) that is intended to help benefits rise along with inflation. However, a common perception is that COLAs have failed to keep up with the higher cost of living associated with essentials like food, shelter, and healthcare.

Based on my calculations, COLAs have increased benefits about 84% since the turn of the 21st century. While that number may sound impressive, have COLAs actually increased benefits enough over the years for retirees to maintain their purchasing power?

Stacking it up against inflation

To calculate the increase in benefits over the last 24 years, I started with the average retired worker benefit in 2000 of $844. Then, I multiplied that benefit by the COLA for each year through 2024 to get this year's monthly benefit amount of $1,551, an absolute increase of 84% or a compound annual growth rate of 2.57%.

You may have noticed that $1,551 is less than the average retired worker benefit today of roughly $1,920 as of Aug. 2024. This is likely due to several factors over the past few decades. Wages have risen over time, and people are retiring later than they used to. The government has also changed how much of Americans' wages are taxed for Social Security.

Because COLAs are based on inflation data, it's natural to believe Social Security benefits have maintained their buying power over time. After all, the primary measure of inflation, the Consumer Price Index for All Urban Consumers (CPI-U), has risen at a similar compound annual rate of 2.54% since 2000. But according to a study by the nonpartisan Senior Citizens League (SCL), benefits have lost 20% of their value between 2010 and 2024 and 36% of their value between 2000 and 2023.

The SCL believes benefits have lost purchasing power because COLAs have been less likely to beat inflation over the last 14 years. It could be a timing issue since COLAs are announced the year before taking effect. Either way, the SCL believes this aspect has had a compounding effect.

Data source: Senior Citizens League.

Another big issue is that certain cost categories have risen at a faster rate than their weighting in various consumer price indexes. As you can see, the cost of housing has increased roughly 81% between 2010 and 2024. This expense makes up about half of the Consumer Price Index for Americans 62 years of age and older (CPI-E). But in the CPI-W, which is used to calculate the COLA, housing makes up a little more than 43% of the total index.

Data source: Senior Citizens League.

The SCL also highlighted individual items that have been problematic for retirees' pocketbooks. For example, roughly three-quarters of Americans 65 and older have a smartphone. Meanwhile, the SCL estimates the most affordable version of the Apple iPhone has increased from roughly $200 in 2010 to about $800 this year, a 300% increase.

Not keeping up

On paper, Social Security benefits may have kept pace with inflation, but in reality, it appears benefits have lost some of their purchasing power.

And this isn't just a problem for older Americans. Most age groups would agree they've felt the effects slower wage growth, higher home prices, and other challenges. While Social Security is not an easy issue to fix, whether you're worried about declining purchasing power or the sustainability of the program, lawmakers need to make changes at some point in the not-too-distant future.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.